The Usefulness of Management Forecast Information

Abstract

This paper investigates the usefulness of management earnings forecasts from the perspective of their value-relevance, their impact on analysts' forecasts, and their usefulness as an investment indicator. The value-relevance of management forecasts of earnings is investigated based on the Ohlson [2001] framework that expresses firm value as a function of the book value of equity, current earnings, and expected earnings. The results show that management forecasts of earnings are more value-relevant than book values and current earnings. When the value-relevance of analysts' forecasts and management forecasts is compared, little difference is found between these two forecasts. Deviation of analysts' forecasts from management forecasts is then examined. The results show more than 80% of analysts' forecasts are identical to management forecasts. Further analysis suggests that the relatively high accuracy of management forecasts may explain their high value-relevance and their large impact on analysts' forecasts. Finally, the predictive ability of P/E, P/B, and P/MF ratios with respect to future returns is examined. The P/MF ratio based strategy generates the highest abnormal returns. Thus, the findings of this paper indicate that management earnings forecasts provide the market and analysts with valuable information and are also useful as a predictor of future abnormal returns.